Understanding the Balance Sheet for small businesses

The balance sheet provides a summary of your business’ assets, liabilities and equity to maintain a strong, healthy and sustainable business.

Unlike the statement of profit & loss that covers incomes and expenses over a period of the year, the balance sheet is a summary of your financial position and a specific point in time.

Whether you’re a sole proprietorship, limited liability partner (LLP), or private limited company (PTE LTD), understanding the balance sheet is key for your business! Keep on reading to find out more.

 

Overview:

Why do you need to love the balance sheet?

In addition to helping you understand the net worth of your company, the most important thing a balance sheet can do is tell you how well you are able to pay back what you owe.

 

As soon as there are any signs that your assets might be too low to cover your liabilities, the balance sheet will enable you to spring into action to bring your business back to health, or risk going out of business.

 

The balance sheet is also a tool that is widely used by investors and lenders to make informed decisions about whether they want to invest in your business.

Here’s how a typical balance sheet looks like:

 

Assets, liabilities and equity

As mentioned, the balance sheet provides a summary of:

  • Assets – everything that’s owned by a business
  • Liabilities – everything that’s owed by a business
  • And the equity that shareholders own in the business.

To help bring these concepts of assets, liabilities, and equity to life – let’s meet Jane and use her personal assets and liabilities to help us out.

It’s simplest to think about the assets in Jane’s life as being anything she can expect to turn into cash such as her apartment, laptop, car, or any shares and investments.

Jane’s liabilities are anything she knows she will have to pay using her cash. For instance, her home loan or any outstanding electricity and phone bills.

Using this information about her assets and liabilities, we can understand Jane’s equity which is the cash left over if all assets were sold and all liabilities settled.

If Jane’s total assets are valued at $600,00 and her liabilities are $400,000, her equity would be the $200,000 leftover.

As an equation, Equity = Assets – Liabilities.

The fact that the two sides of that equation will always balance, is why we use the term “balance sheet”! Notice that Jane’s assets are 1.5x higher than her liabilities. This would generally indicate that she is financially healthy i.e. what she owns is currently sufficient to pay off what she owes.

If your assets are ever looking too close to or lower than your liabilities, always seek support from a finance expert to bring your business back to a healthy position, before things get worse.

Assets: Current assets vs. Non-current assets

You’ll notice that assets and liabilities in this balance sheet are split out into current and non-current assets.

Current assets refer to any cash expected to be received or paid within a year, while non-current assets are anything that will be settled later than that (i.e. more than a year).

This helps those reading the balance sheet to understand if your business is under any current pressure to pay your debt or whether they are due until next year.

Current assets: Cash at bank

What is it? Cash at bank is probably the simplest asset, typically representing the business’ bank balance.

What do you need to understand? Cash is King! It is the oxygen of your business. Your balance sheet tells the story of whether you have enough cash to comfortably pay your debts, help you survive through a tough time, and invest in growing the business – a position that is the clearest indicator of a strong balance sheet, and one that is highly attractive to investors.

Current assets: Accounts receivable

What is it? This balance will likely be the payments due from your customers. For example, when you’ve given them 30 days to pay an invoice once shipping your product out to them.

What do you need to understand? Reviewing accounts receivable will help you to identify if your customers are taking a long time to pay the cash they owe you. Track this carefully because that’s your cash you’re letting your customers hold onto, and you need that cash back into your business as soon as possible to pay your staff and grow!

Current assets: Inventory

What is it? This is the physical goods and products sold by a business to earn income. For example, the shoes that a shoe retailer purchases to sell to customers. 

What do you need to understand? Keeping an eye on your inventory balance will help you understand how long it’s taking to sell the inventory that you purchase.

The cash used to buy inventory cannot be used by the business until the respective inventory is sold to make income. Essentially, the cash is tied up in that inventory. 

Sitting on large stores of inventory that sell very slowly might mean you definitely have enough to meet demand, but could you have bought less, and kept the remaining cash hard at work running your business, while still meeting demand? It’s a difficult balance to strike.

Calling all new business owners – get your company incorporated for free today. For existing business owners, enjoy S$300 savings when you get our corporate secretary and accounting services.

Non-current assets: Fixed assets

What is it? Also known as ‘property plant & equipment’, these are the assets that your business uses in order to generate its income. For example, the machine used to produce the products that a business sells. 

However, over time, their value in the balance sheet will decrease to reflect the wear and tear of these assets. For instance, nobody would pay full price for a machine purchased 10 years ago! 

In accounting, this process is called depreciation.

What do you need to understand? Investment in assets that improve a business’s ability to generate income, sustain operations, and grow is key to a sustainable business. Investors will look at fixed assets as one of the key indicators that a business can support growth.

Non-current assets: Long-term investments

What is it? This is cash that you decide to invest for longer than a year, in the expectation that you’ll receive a higher return on it than if it were just sitting within your business. 

An example would be the high-interest rate on a government bond. 

What do you need to understand? While it is true to reserve some cash to buffer against tough times and to fund plans for operation and growth, there is little value in having too much excess cash in your business (which is a nice problem to have).

You should always seek to put your cash to work and can do so by investing it to potentially earn a high rate of return as opposed to earning next to nothing if it sat idle in the bank.

Furthermore, having too high of a cash balance can prompt an investor reviewing your balance sheet to wonder if your business truly knows what to do with their cash. This is something you’d best want to avoid.

Current liabilities: Accounts payable

What is it? This is typically the cash owed to suppliers if they have provided a service or shipped goods to you,  but either have not invoiced you or payment is not due yet. 

What do you need to understand? Just like how it is important to collect cash as quickly as possible from your customers, it’s also important to not pay your suppliers too soon. 

If they’ve given you seven days to pay, use the cash in your business for those seven days for other more important tasks and only pay once your invoice is due. The key to optimizing the timing of receiving and paying cash is to maintain an organized billing and payments process.

Current liabilities: Bank loan

What is it? This might refer to a business loan, or cash that the bank has lent in order to kickstart or grow your business. This is the portion of the loan due within one year; the rest will sit as a non-current liability. 

What do you need to understand? Bank loans are a form of debt financing. The bank will charge you an interest fee for the service of using the bank’s cash for a period of time. Taking on debt requires a long-term commitment to cover interest payment, and this can easily become a stress if cash flow is tight.

Investors and lenders are particularly interested in understanding how your business is funded, and they will look to the balance sheet to find out.

Equity

What is it? As mentioned earlier, equity is the cash that would be available to shareholders if all assets were sold and all liabilities paid. 

It also might help to think about equity like this: cash leftover in your business had to come from somewhere, right? Yes! There are two main sources of this cash, which together make up the equity balance.

The first is retained earnings which is the cash generated or used by business operations (i.e. the profit or loss) subtracted from any dividends that have been paid to shareholders.

The second is shareholder contribution which is any cash injected into the business by shareholders.

What do you need to understand? Shareholders’ equity is one of two funding options available to a business. It’s very different from debt financing as you are not obligated to return the cash at a point in time. 

However, obtaining equity finance does mean you need to sell part of your business in return for the investment. 

Wrap up

And there we have it! Hopefully, the balance sheet is now a lot clearer to you.  

Before we end, here’s a recap of key reasons as to why the balance sheet is an important business tool that you need to love: 

  1. It tells you about your business’s financial health, and when you might be in trouble, by showing you how easily you’re able to pay back what you owe.
  2. It tells you how much your business is worth.
  3. It is a handy list of everything you own and owe, allowing you to easily see your cash balance, or when your customers owe you money.

Need additional help? Don’t hesitate to reach out to us at Sleek. Our friendly team of accountants and experts is here to help you manage your business.

Other articles that might interest you

Related content

What is InvoiceNow?

InvoiceNow is the process of sending an invoice digitally. With this service, you can send an invoice digitally between accounting systems.

Get in touch.

Start your Sleek journey today

Ready to grow your business to the next level?
Let us help take the load off your shoulders so you can continue doing what you love.

50GB data with unlimited talktime for only S$18/month and additional add-ons!

Circles.Life is a telco provider in Singapore that provides no-contract mobile plans. Their end-to-end integrated service allows customers to manage and design a plan that best fits their needs.

Enjoy the following offers:

  • 50GB data with unlimited talktime (SIM-only) for S$18/month

Once you are a Sleek client, you can access this offer.

Get access to investors, corporates and business advisors

TiE Singapore is a vibrant eco-system of Asian entrepreneurs, angel investors, venture capitalists and industry professionals – TiE has 61 worldwide chapters, 10,000 Startups, 80,000 Attendees and 15,000 members.

Benefits:

  • Exclusive access to an ecosystem of advisors, mentors, investors, corporate heads via discounted programs
  • Expand your reach beyond Singapore by attending all local and global events
  • A chance to showcase and pitch your ideas to industry leaders and investors
  • Network and build connections to engage with business experts, thought leaders and fellow entrepreneurs

Form your US company with Stripe Atlas

Stripe Atlas is a safe and easy-to-use platform for forming a US entity by removing obstacles that are typically associated with starting a company such as – legal paperwork, bank lines, obscure fees and regulatory barriers.

Enjoy the following benefits:

  • Get a discount from SGD $200 onwards on an Atlas incorporation
  • Use their services from anywhere in the world
  • An opportunity to connect with other founders and learn from experts

Enjoy up to SGD $1,425 off on eBay store and promotion fees that are incurred in the first quarter of your operation

eBay is a world-leading online marketplace that facilitates consumer-to-consumer and business-to-consumer sales.

Sleek clients can benefit from a special promotion when they:

  • Sign up as new sellers on eBay
  • Offer a minimum of 100 SKUs in their online store

You will be eligible for:

  • 100% reimbursement of the store and promoted listing fees for up to 3 months, capped at SGD $1,425, subject to promotion T&Cs

How do you qualify?

  • Leave your contact details in eBay’s New Seller Form
  • eBay’s New Seller Account Management team will review your application and reach out to guide you on the account setup
  • Once approved you will receive a promotional email from your Account Manager

Enjoy your stay with Hmlet by getting corporate rates

Hmlet provides a custom designed, fully furnished, affordable and hassle-free coliving housing solution, perfect for entrepreneurs arriving in Singapore.

Enjoy the following benefits:

Get 10% when you stay with Hmlet in Singapore
Perfect opportunity to expand your network with Hmlet’s diverse community
Enjoy dedicated assistance from Hmlet Community Managers
Flexible month-to-month membership plans

*For new members only

Promotion is valid for any length of stay up to one year.

Contact Joanna at +65 8462 6446 to get the discount.

Gain instant access to the top coworking spaces around Singapore with FlySpaces Passport


FlySpaces provides short-term flexible workspace solutions, fully-furnished and fully-serviced, for entrepreneurs, SME’s, and corporates setting up their businesses in Southeast Asia.

Enjoy the following benefits:

  • 1 month free trial of Passport Starter package and 25% off the first month of any Passport package
  • Flexible packages that scale with your business
  • Dedicated assistance from a FlySpaces Space Expert

*For new members only 

Get 3 months free trial

Metigy is the world’s leading Digital Marketing Decision Support technology made for SME Marketers. Metigy’s AI platform helps SME’s achieve 2x-3x improvement quarter on quarter.

  • AI-powered real-time insights and recommendations platform
  • Set objectives and follow Metigy’s content recommendations
  • Planning calendar, content library and social analytics
  • Prioritised to-do list and approval workflows

Once you are a Sleek client, you can access this offer.

Join Hubspot for Startups and get up to 90% off your Hubspot subscription in your first year

We’re excited to partner with HubSpot for Startups to offer their program designed specifically to help startups grow and scale better, and faster – at a startup-friendly cost! Read on to learn more about the program.

What is the HubSpot for Startups program?

  • Education resources and tailored training
  • Professional software, startup pricing
  • Integrated platform for startups

Who is eligible?

Any startup that is a current customer of Sleek and meets certain funding criteria is eligible for this exclusive program! See below for more details:

  • A startup with under $2 million in funding: ou are eligible for up to 90% off HubSpot software in your first year, 50% off in your second, and 25% off ongoing.
  • A startup who has raised over $2 million in named funding up to and including Series A: You are eligible for up to 50% off in your first year, and 25% off ongoing.

*The HSFS startup-friendly pricing is only applicable to net-new HubSpot Hubs or upgrades of existing Starter subscriptions to Basic, Professional, or Enterprise products; customers may not apply the startup program pricing to existing Basic, Professional, or Enterprise Hubs.

Once you are a Sleek client, you can access this offer.

Get 10% discount on Google Workspace licenses

Google Workspace offers custom email for your domain, online storage, shared calendars and a range of collaboration tools to increase the productivity of your team.

  • Gmail for business
  • Gsheets, Gdocs, Gslides and Google Meet
  • High security and online file storage

A 10% discount is provided for all new domains and transfers.

Once you are a Sleek client, you can access this offer.

Get US$5,000 in AWS Promotional Credits

*Only available for technology startups

Amazon Web Services provides startups with low-cost, easy-to-use infrastructure needed to scale and grow any size business.

You will be eligible for:

  • US$5,000 in AWS Promotional Credits valid for 2 years
  • 1 year of AWS Business Support (up to US$1,500)
  • Opportunities to qualify for additional credits 
 
Note: Companies may not be eligible for AWS Activate Credits if they previously received a similar or greater amount of credit. Companies may be eligible to be “topped up” to a higher credit amount if they previously received a lower credit.  For more information, please review the AWS Activate Terms & Conditions.
 
Once you are a Sleek client, you can access this offer.

Manage your company spending with a 3-month free trial

Spenmo is a B2B spend-management platform with physical and virtual card offerings. We aim to digitise expense processes and help companies eliminate fraud and overspending.

Enjoy the following benefits:

  • Free physical and virtual cards for up to 15 employees and 2% unlimited cashback for the first 6 months
  • $100K worth of free local and international invoice payments
  • Free cash reimbursement software

Once you are a Sleek client, you can access this offer.

Get S$10,000 in processing volume credit

Stripe is the best software platform for running an internet business. Stripe provides the technical, fraud prevention, and banking infrastructure required to operate online payment systems.

  • Fast, reliable and secure
  • Faster eligibility period for custom processing rates
  • Priority betas and special event access

Once you are a Sleek client, you can access this offer.

Free multi-currency account for businesses and online sellers

WorldFirst is an innovative global payment platform, helping businesses move money around the world faster, easier, safer and cheaper. 

Sleek clients can enjoy the following:

  • Open up to 10 international currency accounts for free: SGD, USD, GBP, EUR, CAD, AUD, NZD, JPY, HKD & CNH
  • Receive, hold and make payments in international currencies
  • Open your account for free with no monthly account fees and no annual transfer limits
  • Access great exchange rates
  • Manage your global finances all on one platform
  • Instant FX transactions between currency accounts

Do note that WorldFirst only works with online sellers.

Open a Singapore dollar business account from anywhere.

Wise is a global technology company that’s building the best way to move money around the world. Whether you’re sending money to another country, spending money abroad, or making and receiving international business payments, Wise is on a mission to make your life easier and save you money.

Enjoy the following benefits:

  • Enjoy S$2,600 fee-free transaction
  • Get bank details in 6 currencies: SGD, GBP, EUR, USD, AUD, NZD
  • Sleek customers get access to the Wise Platinum debit Mastercard
  • Get support from our global team in Singapore, Europe, and the US